Change Management And Offshore Outsourcing Aom Conference

Processual View of Managing Change Related to Offshore IT Outsourcing Implementation

2008 Annual Meeting of the Academy of Management,

Anaheim, CA

T.R. Ramanathan, DBANewcastle Business School

Northumbria University

August 8-13, 2008

Entire contents © 2008 T.R. RamanathanPage 2

Agenda

Introduction

Theoretical Perspective

Methodology

Findings

Conclusion

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Introduction


Business Problem and Strategy

Large pharma business environment has changed

Drug development costs have increased ~3.5 times to $802M in 15 years (DiMasi, Hansen & Grabowski, 2003)

Declining R&D productivity - from 53 new drugs in 1996 to 17 in 2002 (WSJ, 2004)

Blockbuster business model is expected to deliver just 5% return on investment, lower than the industry’s risk-adjusted cost of capital (Gilbert, Henske & Singh, 2003)

Two main challenges for generating growth

Controlling costs

Improving R&D productivity

Various change initiatives to address these issues

Companies recognize offshore outsourcing as a key trend in IT

PharmaCom (pseudonym), a global company, initiated a company-wide offshore initiative in 2003 targeting the IT departments of the different business units


Research Question and Study Propositions

How do IT organizations manage change associated with offshore outsourcing of information technology services, and what lessons can be learned from their experiences?

a) To explore the environmental forces (internal and external) that either foster or hinder the adoption and use of offshore outsourcing

b) To identify the organisational factors that either contribute to or prevent successful change management

c) To understand the effects associated with offshore outsourcing, as perceived by the organisational members involved in this change

d) To contribute to a better understanding of the problems and possible solutions related to managing change for offshore outsourcing with a view to improve professional practice

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Theoretical Perspective


Social Systems Theory

Open systems view of organization (Scott, 1992) Organization is in constant interaction with the environment, processing inputs into

outputs

System maintains itself through a process of exchange with its environment

Organizational survival depends on being able to adapt to the environment

Notion that there is no “one best way” to organize is central to this approach

In the open systems view, organizational change is A rational formulation of long-term goals based on a strategic analysis of the

environment

Used to propel growth and development

Something human agents are able to bring about in a predictable and controlled manner

A process that unfolds over time

One needs to look at both inside and outside the system to understand the process of change


Theoretical Framework

The processual approach (Dawson, 2003) is a useful method for explaining this organizational phenomenon

Represents movement over time from present to future state of organization

It deals with the scale or scope of change

Generic process model proposed to understand the change process

It is based on the significance of four components (Context, Diagnosis & Planning, Implementation, and Institutionalization)

It enables data organization and empirical analysis of the characteristics of the change process components

Used only as a starting point for the inquiry

Context:External FactorsInternal Factors

Diagnosis& Planning

Implementation Institutionalization

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Methodology


Research Methodology

Research Strategy Qualitative Case Study Multiple Case Design (replication logic)

Data Collection Semi-structured Interviews (taped and transcribed) Direct Observation (recorded as field notes) Document Analysis

Unit of Analysis 3 IT Departments of PharmaCom (R&D, Sales & Marketing, Corporate) 3 embedded levels analyzed within each case: Sr. Managers (5), Middle

Managers (5) and Non-Managerial Employees (11)

Purposive Sampling Case organizations, Study Participants


Research Methodology contd.

Analysis Strategy Template Analysis (King,1998)

Combines deductive and inductive approaches A priori template of codes is first derived based on literature Template is subsequently modified as analysis proceeds Ensures critical issues are covered in the analysis

Coding Tool: EZ-Text Software Within-Case Analysis (Miles & Huberman, 1994) Cross-Case Synthesis (Yin, 2003)

Validity and Reliability Multiple Cases Analytical Generalization (Yin, 2003)

Results generalized to broader theory Data Triangulation, Peer Consultations Case Study Protocol, Case Study Database

Ethical Considerations Informed Consent Pseudonyms used for case organisations and the study participants Non-release of data that may potentially cause harm to participants

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Findings


Context

Interviewee Perspectives [The pharma] Industry is under economic and financial pressures… [It is driven by the] Lack of internal resources to complete the tasks, high costs

associated with [local] contractors, budget constraints together with the demand for increased productivity, and the need to disengage from low-value tasks such as maintenance and monitoring…

[It is driven by a] Decrease in willingness to spend on technology…

Category Change Process Components Case 1 Case 2 Case 3 External Forces:

Economic Political/Legal Technology

Internal Forces: Leadership

CONTEXT

Resources


Diagnosis & Planning

Interviewee Perspectives …you need strong leadership and vision to implement changes of this kind. …we should have a clear, long-term oriented offshore strategy. Our ability to get our internal business partners ready for this change is also critical… We have created a [Change Management Team]...if [senior managers of the IT

departments] are on board as evangelists, there is a better chance of success.

Category Change Process Components Case 1 Case 2 Case 3 Diagnosis of the Need for Change:

Establish a sense of urgency Develop a vision for change Data gathering and analysis

Strategy for Change Change Implementation Planning:

Change management team Benefit identification and delivery

Stakeholder management Resource allocation Education and training Feedback mechanisms Vendor selection and sourcing

DIAGNOSIS AND

PLANNING

Performance measurement


Implementation

Interviewee Perspectives A continuous focus on communication [is needed]… …people need time to work through the emotions [i.e. transition] required from this

change. It is better to start small [i.e. pilot projects] and then move on to bigger projects so that

the organization gets assimilated successfully. Resistance should be expected and addressed… …offshoring is all about change in culture.

Category Change Process Components Case 1 Case 2 Case 3 Communicate the vision Implementation approach

Transition management Pilot projects IT operations Resistance management

IMPLEMENTATION

Organisational culture


Institutionalization

Interviewee Perspectives …unclear roles and responsibilities, unclear statement of work, and too much

dependence on the [offshore vendor’s] onsite coordinator. People have gained new skills (e.g. vendor management)…have more interesting

jobs…those who cannot reschool themselves into the more business-facing roles, will have a tough time being successful in the company.

…a lot of learning in the mid-term…i.e. how to better use operational processes and procedures to ensure that the changes really do deliver on the cost savings.

Change management ends when the group [i.e. internal staff and offshore personnel] works as a cohesive unit…

Category Change Process Components Case 1 Case 2 Case 3 Job roles and organisational design

Rewards and recognition Organisational learning

INSTITUTIONALI

-SATION

Sustaining the change

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Conclusion


Summary and Study Limitations

Summary Adopting a processual view helped to examine the influence of the company’s history and internal

and external environments on the events and activities that led to offshoring Combination of internal and external pressures for change created an environment receptive to the

adoption and use of offshoring– Internal context, especially resource constraints, provided an important incentive to support the

adoption of offshoring– Further study is needed of the internal characteristics motivating change in organizations

Several organizational factors in combination are necessary for positive outcomes with offshoring– Success depends on change strategy adequately addressing these factors– Taking these factors into account during planning helps to minimize employee resistance

To be successful, senior management must make every effort to maintain high employee morale during offshoring

With services globalization emerging as an inevitable trend in today’s world economy, effective change management can positively impact the firm’s profitability and shareholder value

Limitations Results are informed by a small sample that was purposively chosen The findings represent only one pharma company and may not be generalized across the pharma

industry


What Lessons can be Learned?

Process Model of Offshore Outsourcing Implementation A way of conceptualising the change process related to offshore outsourcing implementation Model represents what employees and the management perceived how the change related to

offshoring was managed This model is similar to the generic process model of change shown earlier

– Difference is in the emphasis on corporate vision and organisation in the proposed model– Corporate vision appeared to be a key feature because it allowed the organisation to adapt to

dramatic changes in contextual conditions– Another feature is the alignment of the organisation with the corporate vision - the top

management leveraged the vision as a tool to align the organisation with the corporate goals

External

Forces

Internal

Forces

Planning &

Design

Context

Diagnosis & Planning Implementation

Diagnosis Institutionalisation

Feedback

Corporate Vision

Implementation

Institutionalisation

Organisation

What

How

Who


References

Dawson, P. (2003) Understanding Organisational Change: The Contemporary Experience of People at Work. Thousand Oaks, CA: Sage.

DiMasi, J.A., Hansen, R.W., & Grabowski, H.G. (2003). The price of innovation: New estimates of drug development costs. Journal of Health Economics, 22, 151-185.

Gilbert, J., Henske, P., & Singh, A. (2003). Rebuilding big pharma’s business model. In Vivo: The Business and Medicine Report, 21 (10): 1-10. Norwalk, CT: Windhover Information, Inc.

King, N. (1998). Template analysis. In Qualitative Methods and Analysis in Organisational Research, G. Symon and C. Cassell (Eds.), 118-134. Thousand Oaks, CA: Sage.

Miles, M. B. & Huberman, A. M. (1994). Qualitative Data Analysis (2nd ed.). Thousand Oaks, CA: Sage Publications.

Scott, W.R. (1992). Organisations: Rational, Natural and Open Systems. Englewood Cliffs, NJ: Prentice-Hall.

The Wall Street Journal. (2004). Researchers try to cut new path to pharmacy. January 12.

Yin, R.K. (2003). Case Study Research: Design and Methods (3rd ed.). Thousand Oaks, CA: Sage.

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Backup Slides


Drug Development Costs


Product Failure in Late Stage Development

Source: PharmaCom, 2003


R&D Expenditures as Percentage of Sales - 1970-2004

Source: PhRMA, PhRMA Annual Membership Survey, 2005

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1970 1980 1990 2000 2004*

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Global Pharmaceutical Sales - 1970-2004


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100000

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1970 1980 1990 2000 2004*

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2003 R&D Expenditures by Geographical Regions


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80.1

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16.8

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Africa Americas Asia-Pacific Australia Europe Middle East

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Annual Growth in Prescription Drug Spending - 1997-2002

Source: IMS Health, Retail and Provider Perspective, 2002

14.2

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14.7

16.9

11.8

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Documents

Change Management And Offshore Outsourcing Aom Conference